Amazon Price Target as In-House Chip Business Hits $20 Billion

High-tech/e-commerce giant Amazon (AMZN) released the firm's first quarter financial results on Wednesday evening alongside several other mega-cap tech names.

Amazon reported a very solid quarter with an acceleration visible where it matters most. This is that story.

For the period ended March 31, Amazon posted a GAAP EPS of $2.78 on revenue of $181.519 billion. While that bottom-line print beat Wall Street by more than $1 per share, the top-line number beat consensus by more than $4 billion. That's not just crushing expectations, that's special. The sales print also reflected year-over-year growth of 16.6%, the most aggressive pace experienced by the firm since Q2 2021.

President and CEO Andy Jassy commented in the press release:

“We’re making customers’ lives easier and better every day across all our businesses, and their response is driving significant growth. AWS is growing 28% (our fastest growth in 15 quarters) on a very large base, our chips business topped a $20 billion revenue run rate (growing triple digits year-over-year), Advertising grew to over $70 billion in TTM revenue, and unit growth in our Stores reached 15% (the highest since the tail end of covid lockdowns).”

Operations

You know that revenue grew 16.6% to $181.519 billion. Within that number, sales of services increased 20.2% to $91.697 billion and product sales increased 11.5% to $71.304 billion. Total operating expenses grew 15% to $87.463 billion leaving an operating income of $23.852 billion (+29.6%). That number was more than $5.4 billion better than expected. Incredible. Operating margin improved from 11.82% to 13.14%.

After accounting for interest, other income and expenses and taxes, GAAP net income hit the tape at $30.255 billion (+76.7%, not a misprint). This works out to $2.78 per fully diluted share simply drubbing the year ago comparison of $1.59.

Segment Revenue Performance

Online Stores generated sales of $64.254 billion (+11.9%), crushing expectations
Third-Party Seller Services generated sales of $41.578 billion (+13.9%), beating expectations
Amazon Web Services (AWS) generated sales of $37.587 billion (+28.4%), beating expectations
Advertising Services generated sales of $17.243 billion (23.9%), beating expectations
Subscription Services generated sales of $13.427 billion (+14.6%), beating expectations
Physical Stores generated sales of $5.785 billion (+4.6%), missing expectations
Other generated sales of $1.645 billion (+25.4%), beating expectations

Geographic Performance

North America generated sales of $104.143 billion (+12%), crushing expectations. This produced an operating income of $8.267 billion (+42%), still crushing expectations, on an operating margin of 7.94%, up from 6.29%.
International generated sales of $39.789 billion (+19%), beating expectations. This produced an operating income of $1.424 billion (+40%), still beating expectations, on an operating margin of 3.58%, up from 3.03%.
AWS generated sales of $37.587 billion (+24%), beating expectations. This produced an operating income of $14.161 billion (+23%), crushing expectations, on an operating margin of 37.68%, down from 39.45%.

Guidance

For the current quarter, Amazon is projecting revenue of $194 billion to $199 billion, which would be good for annual growth of 16% to 19%. Wall Street was looking for something close to $189 billion, so this is a decisive beat. Operating income is seen at $20 billion to $24 billion. The midpoint of that range is inline with what Wall Street had in mind.

Fundamentals

For the period reported, Amazon generated operating cash flow of $26.032 billion. "Out of this number" came capex spending of $44.203 billion, leaving "free" cash flow of -$18.171 billion. Free cash flow, due to the big up-spend on AI infrastructure, has dropped to $1.232 billion over the trailing 12 months, down from $25.925 billion a year ago, but this was not unexpected. The firm does not return capital to shareholders.

Turning to the balance sheet, Amazon's cash position ended the period at $143.089 billion with inventories at $36.534 billion. That puts current assets at $255.155 billion. Current liabilities add up to $216.756 billion, including unearned revenue of $20.887 billion and no short-term debt. That puts the firm's headline current ratio at 1.17 or 1.30 when adjusted for unearned revenues. These ratios are impressive for a firm heavily involved in the retail trade.

Total assets amount to $916.63 billion, or which intangibles are a very small percentage. Total liabilities less equity comes to $474.716 billion. This does include long-term debt of $119.074 billion, which has grown rapidly, but can still be taken care of out of pocket. This balance sheet is not what it was a couple of years ago but is still a strong balance sheet.

Opinion

The quarter was strong. AWS did very well. Performance and profitability are accelerating nicely. The firm has spent a lot on AI infrastructure and still has a strong balance sheet capable of sustaining negative free cash flow for a time if necessary.

The in-house chip business is running hot and operating at a $20 billion annual run rate. The firm may have to break out this business in the results going forward as they do for AWS. The chips are that hot.

Readers will see that AMZN has recently broken out from a $259 pivot created by a rectangle pattern after having rebounded out of a double-bottom pattern. While relative strength is technically overbought, the daily MACD is set up in overtly bullish fashion.

The stock has already retaken both its 50-day SMA and 200-day SMAs. Should the 50-day line overtake the 200-day line (golden cross) while that red line is rising, there would likely be a positive algorithmic reaction. I will be adding to my long position. My target price is $324.

At the time of publication, Guilfoyle was long AMZN equity.